The Troubled Asset Relief program (TARP) was originally touted to Congress and the public as a request for funds to purchase troubled home loans, helping lenders get them off the books and loosening up money for deserving mortgage borrowers. However, once passed, that plan was junked in favor of less direct help.
TARP: What Happened to the Homeowners?
Instead of buying up bad home loans, Treasury Secretary Henry Paulson elected to purchase stock in the biggest lending institutions, in theory supplying cash to lend and thaw frozen credit markets. Treasury official Neel Kashkari claimed that this would somehow help struggling homeowners. “Our system is stronger and more stable than just a few weeks ago,” he said.
New Plan Has Worked Before
The feds believe that putting money directly into mortgage markets is better because the money goes further. For every dollar banks receive, they can make more than $10 in loans because of something called the “multiplier effect.” It’s the way money works–for example, if a lender has $1 million in deposits it may lend $800,000 and keep only $200,000 on hand for depositors. So in effect that $1 million becomes $1.8 million. And it goes even further–that money is spent, and deposited, and loaned again, multiplying the effect of the original million on the financial system. Thos strategy has worked before: Swedish banks were successfully bailed out in the 1990s when the government bought up their stock and the economy was stabilized.
No Help for Homeowners in Sight
Unfortunately, this change means that no direct help to those in imminent danger of losing their homes will be forthcoming from TARP. FDIC Chairman Sheila Blair and House Financial Services Committee Chairman Barney Frank have warned that the foreclosure crisis will worsen to the tune of up to 5 million foreclosures over the next two years.
What Should Homeowners in Trouble Do?
If your mortgage is pulling you under, you won’t get any breathing room from bailout funds. Your best chance to save your home remains with your lender, HUD housing counselors, or FHA. Hope for Homeowners has made some changes designed to help more people, increasing eligible LTVs to 96.5% from 90% and allowing 40 year terms, making refinances available to more homeowners. FHASecure allows those with ARM home loans to refinance even if they are behind on their mortgages or have credit problems–if the problems were caused by an upward reset of their ARM payment. The Treasury Department’s current strategy is focused on keeping lenders afloat and driving refinance interest rates down, eventually stabilizing the economy. Those who can’t wait for that should not count on help from the TARP program.
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